ABSTRACT
This chapter aims to take jump risks into the modeling and pricing of London Interbank Offer Rates (LIBOR) derivatives. In many ways, the Levy LIBOR model can be regarded as a generalization to the Glasserman and Kou model, a pioneering piece of work that models jumps using marked point processes. Once the swap rate process is approximated by a Levy process, swaption pricing can be done through the method of Laplace transform. An industrial approach to determine the pair is to calibrate the model to market prices of benchmark instruments. The chapter describes the analytical approximation method which utilizes the Merton formula under the jump-diffusion model for underlying state variables. After stepping into the new millennium, Federal Open Market Committee (FOMC) had enhanced their dialogue and communications with the financial industry, such that surprises to the market due to the minutes of FOMC meetings have now become rare.
